Are Home Warranty Plans Necessary?

16 Replies

I have two rental properties (one of which is currently occupied) and I have home warranty plans with Complete Appliance Protection, Inc. for each of them. My question is, is it necessary to have home warranty plans in place?

If not, what are some best practices for landlords handling repairs? 

I haven't thought about a home warranty plan, but what I did was buy brand new appliances for both units.

2 stoves and 2 refrigerators at Home Depot for all of $1600 and now I don't have to worry about repairs.

Home warranty plans are one of the biggest rip offs in this industry.... They'll spend years putting band-aids on things that need to be replaced, and find every reason to deny legitimate claims. Save your premium money and pay cash when something breaks. You'll come out ahead in the end.

I used a home warranty plan for a property in Dallas, Texas and it worked really well for me. It cost me about $600/y and there was a co-payment of $75 per visit. I rolled the cost of the home warranty into the rent and put the responsibility on the tenant to pay the co-payment (spelled out in the lease). Two years in a row the Air conditioning unit went out during the summer and they paid to replace it. Over the years it was well worth the money. If you put some thought into it, you can make it work for you.

Mine was worthless (got it for free with purchase). I tried to get my sewer lateral replaced under it and they said they'd cover the cost of material only, I had to cover the cost of labor. Sweet thanks, cover some plastic pipe...

I have not had good luck with home warranties.    They really push to repair even when replacement is truly warranted.  Example:  HOuse had a 34 year old AC. Yes 34 years old. THey had to come out and fix 3 times over summer, but would not replace since it was still fixable... but it was so old that everything kept breaking.  Not worth it in my book.  Takes forever to get them out there and then half the time they say they wont cover the repair.

Just keep the $500 that you woul d have paid Plus the $75 copay for each visit and put that towards the repairs yourself.  bestof luck!

WOW!  This group is really torn in 2 extreme directions.  I hope I can shed some light to help.

Home Warranties are like any other type of insurance.  You feel like it's useless when it doesn't get used, but are grateful when something catastrophic happens and it is there for you... Just like your car insurance or health insurance.  Equally notable....there are all kinds of home warranties.  Some only cover appliances.  Some cover major systems (HVAC, electrical, basic plumbing), but not personal appliances like the fridge or washer/dryer.  Others cover only specific items like the sewer line from the street to the house.

As @Maria Flowers so clearly pointed out, it can be used as a tool to not only help with repairs, but eliminate you as the middle man for every little thing as the Tenant can be set up to submit claims and pay the trade call fee if written in the lease to do so.  

It is true that Home Warranty companies sometimes go through an overly cautious repair period prior to replacement....just like your doctor may send you to physical therapy before he elects for surgery.  But put this in perspective.... you spend $500 for the home warranty, and they are trying to evaluate whether or not to put out $3K for a new AC unit!  I would say it was worth the investment, as well as the extra time for them to trouble-shoot.  It IS easy to feel the frustration during this period, but again, put it into perspective for what you just avoided paying that the home warranty is picking up for you.

Also, what alot of people don't know about some of these warranties, is that if you don't like their decision to repair, or whatever the recommended course of action is, you can opt to take a cash settlement for the cost of the repairs they are proposing, and then go do whatever course of action you want to do.  We did use this option for a pool repair once.  The warranty suggested replacement of some parts in the filter, which also required it to be emptied and refilled with sand (which is expensive to do).  We opted to take the money and replace the filter because the expense to do so was only a couple hundred dollars more than they were going to pay for all the repair work and sand replacement on the old filter system.

As an added bonus, a home warranty sets you up with contractors for various repairs, which is also a great tool for you as an investor as you get to build your contact list of credible contractors to refer back to when it comes time for a rehab.

All that being said....Home Warranty companies are not all alike!  Shop around.  Read their brochures to see what EXACTLY they cover.  I have found that Old Republic Home Protection is a good one.  Check to see if they are offered in the area that the property is located.  They replaced 2 AC units in our properties this year alone!  Not bad for a $500 investment per property.  That would have been $7K out of my pocket within a 45 day span of time.  No thanks!

I hope this helps.  Best of luck to you!!

These things cost $500 a year give or take. On average, how many years do you spend that much repairing appliances? Seems like you would be better off to set the money aside in a reserve account and dip into as needed.

Originally posted by @Fred Heller :

These things cost $500 a year give or take. On average, how many years do you spend that much repairing appliances? Seems like you would be better off to set the money aside in a reserve account and dip into as needed.

 It's not just appliances for a warranty in that range.  Home warranties cover electrical, plumbing, HVAC, pools/spa equipment, garage door openers, water heaters, garbage disposals, and so much more!  Now think about how much it would take to set aside each month to cover those types of items..... times how many properties?  If you do the math, a $500 home warranty will break down to $41.66 per month, per property, which is a TOTALLY doable line item.  

Truth is...if you only have 1 property, it may be okay to roll the dice with your $500 in a reserve account, but for owners with multiple properties, this can break a reserve account if 2 or 3 of them have AC units go out in the same season, which is common.

My most recent rental in Phoenix had the AC unit (18 years old) go out in the middle of July.  I had received 1 yr of 'free' insurance through the purchase of the home and the insurance company contracted out a company to do the estimate, who said it needed a new compressor, but he never submitted his actual bid back to the insurance company.  Two weeks into it they cancelled his contract due to non-submission and hired someone else.  This person had to start the process all over and go out one day to specifically determine what was wrong with the AC unit, even though we already knew from the previous guy what was wrong.  Sure enough he said the same thing was wrong, and while he did ultimately submit his bid back to the insurance company, it took another week for him to do so.  I googled both of the companies that were sent to the property and both of them had 1 star reviews and their telephone lines went straight to voicemail and never returned one of my calls.  I was in constant contact with the insurance company stating that AC in July in Phx isn't a nicety, it is a health necessity and that this process needed to be expedited 10fold, I was repeatedly told that none of that was their problem, and that I was not allowed to hire my own repair service and be reimbursed on the back end.  When the insurance company finally received his itemized bid of repairs, they said that they would only cover roughly half of the cost, which was the cost of the compressor.  The other half, (draining existing Freon, disposition, and refilling ect) was not covered as they do not insure Freon.  WHAT!?  How can you insure an AC unit and not insure the substance that actually makes the unit run? 

Long story short after having my tenant suffer through the phoenix summer heat for a month with no repair in sight, and the actual 'repair' would have been a band-aid fix on an old system of which I would have to pay half for anyway I told my insurance company to cash me out.  They sent me a check for the amount that they would have covered to replace the compressor, and I called my repair team and they had a brand new unit fully installed within 8 hours.  Needless to say the insurance was not renewed at the end of the year.

Insurance companies rarely if ever pay out like you would assume that they should, and often do more harm then good as the very long delays in repairs causes significant stress on your tenants and strains your relationship with them.  Even in a best case scenario it would have taken a week to repair this AC unit, if you were the tenant how happy would you be living in 120 degree house for a week with no AC?  Remember, in the long run the insurance company is in business to make money, meaning they are collecting more than they are paying out.  Why would you find this acceptable if you can simply budget properly for capex expenses like you should be doing?

@Kareem Aaron I don't purchase home warranty on my rental properties, nor on my primary residence. I had a policy on a rental property for a year when I was trying to hedge my chances that the A/C would die that summer (wouldn't you know it's still going strong 4 years later). I did make a claim for a hot water heater that stopped working, and it was a huge PITA. Similar to what @Ben Zimmerman described, the whole process took 2-3 weeks, with multiple contractor visits (I had to grant access every time), and finally culminated with them installing a new hot water heater. I ended up paying about $800 for non covered "code compliance" items and other upgrades. I could have spent less than that and had a new hot water heater installed in one day! Luckily I had gracious and patient tenants.

These policies used to be pitched heavily by real estate agents trying to get their client's offer accepted in a competitive environment (mid 2000's anyone?). The script might have gone "Don't worry about waiving the inspection period, we'll just get you a home warranty plan to cover anything that's wrong with the house!" I now tell my clients that unless the seller is offering a home warranty, it's better not to ask for one and instead negotiate better terms elsewhere.  

Most professional property managers won't touch Home Warranties with a 10-foot pole. They are set up to favor the company, not the customer. There are many things not covered. Even the things that are covered could require a lot of effort on your part to file a claim, get it authorized, and then hire the contractor they approve of.

@Kareem Aaron    I am going to be blunt... as always.  Home warranties are a bad investment.  If one cannot afford to purchase an appliance they should not be a landlord.

Landlords are in the business of profiting off other people not being able to save.  They should not be giving profits to a home warrantee company because they cannot save.

@Kareem Aaron Not all the time. It depends on your level of risk.

Some have them for bigger items, just in case. Though, it's good to build a network of professional contractors that can help you out in a bind. 

In my opinion they are not worth it and can really be a PITA to deal with when you have an issue. They also tend to exclude many items - for example the first personal house I purchased came with a home warranty purchased by the sellers. After about a month of living there I found out the pressure tank (home had well water) had failed. Called up the warranty company and was told they don't cover it. I checked the paperwork and sure enough it said it was excluded (along with quite a few other items). 

Often on a used property out of fear.  I would let your realtor buy you a warranty. After it expires decide you want one or not.

After reading through all the posts here, I decided to just cancel my home warranty plans. Thanks for all your valuable input. 

Join the Largest Real Estate Investing Community

Basic membership is free, forever.